President of the European Central Bank Christine Lagarde has warned that recent turmoil in the global economy could bring about lasting changes that keep inflation pressures higher than normal and complicate policymakers' roles.
Speaking at the annual Jackson Hole economic symposium in Wyoming, Lagarde said on Friday that central bankers "must be highly vigilant so that larger relative price volatility does not seep into medium-term inflation expectations through persistently cost-pushing wage-price dynamics."
She argued that if global supply becomes less flexible, including in labor markets, and international competition decreases, prices will play a bigger role in adjustment. Lagarde also said central banks need clarity, humility and flexibility to deal with uncertainty caused by multiple shocks to the global economy from COVID-19, Russia's invasion of Ukraine and other geopolitical tensions.
Her comments come after Federal Reserve Chair Jerome Powell warned that the Fed has not yet seen evidence that inflation is slowing meaningfully and more rate hikes may still be needed. Central banks face difficult trade-offs as they try to lower inflation without unduly harming business activity and household spending.
While Lagarde gave few signals about which way the ECB is leaning on rates, she stressed the need to set them at "sufficiently restrictive levels for the longest necessary period" to return inflation to target over the medium term. With eurozone inflation halving from last year's peak but still well above target, this debate is set to continue.
